Cyprus Taking 40% Of Accounts Over 100K Euros

Cyprus dodged a disorderly default and unprecedented exit from the euro by bowing to demands from creditors to shrink its banking system in exchange for 10 billion euros ($13 billion) of aid.

The revised accord spares bank accounts below the insured limit of 100,000 euros. It imposes losses that two EU officials said would be no more than 40 percent on uninsured depositors at Bank of Cyprus Plc, the largest bank, which will take over the viable assets of Cyprus Popular Bank Pcl, the second biggest.

The revised accord spares bank accounts below the insured limit of 100,000 euros. It imposes losses that two EU officials said would be no more than 40 percent on uninsured depositors at Bank of Cyprus Plc, the largest bank, which will take over the viable assets of Cyprus Popular Bank Pcl, the second biggest. Photographer: Simon Dawson/Bloomberg

Cypriot President Nicos Anastasiades agreed to shut the countryâs second-largest bank under pressure from a German-led bloc in a night-time negotiating melodrama that threatened to rekindle the debt crisis and rattle markets.

It was the second time in nine days that Cyprus struck a deal with its euro partners and the International Monetary Fund, capping a tumultuous week that underscored the contradictions of the crisis management that has dominated European policy making for more than three years. Cyprus, the euro areaâs third- smallest economy, is the fifth country to tap international aid since the crisis broke out in Greece in 2009.

The first Cypriot accord, reached March 16, fell apart three days later when the parliament in Nicosia rejected a key plank, a tax on all bank accounts that sparked the indignation of smaller depositors. Efforts to win an alternative bailout from Russia, which lent Cyprus 2.5 billion euros in 2011 when the nation was shut out of international markets, failed.

âPlaying Gamesâ
âNobody knows where we are heading,â said Epifanos Epifaniou, 50, who used to drive a delivery truck in Nicosia and has been unemployed for six months. âPeople are playing games with Cyprus. We are alone. Nobody is supporting us.â

The euro strengthened, trading 0.2 percent higher against the dollar at $1.3018 as of 11:03 a.m. in Frankfurt. Stocks gained, with the Stoxx Europe 600 Index rising 0.9 percent. Italian 10-year bonds erased their decline since last monthâs inconclusive election.

Bartering

The breakthrough came when Anastasiades bartered with officials including EU President Herman Van Rompuy, European Central Bank President Mario Draghi and IMF Managing Director Christine Lagarde. It was then sealed by the finance ministers, some of whom went out to dinner while the talks were ongoing.

With the ECB threatening to cut off emergency financing for tottering banks as soon as today, Cyprusâs leaders engineered another way of shrinking the islandâs financial system.

The revised accord spares bank accounts below the insured limit of 100,000 euros. It imposes losses that two EU officials said would be no more than 40 percent on uninsured depositors at Bank of Cyprus Plc, the largest bank, which will take over the viable assets of Cyprus Popular Bank Pcl (CPB), the second biggest.

Cyprus Popular Bank, 84 percent owned by the government, will be wound down. Those who will be largely wiped out include uninsured depositors and bondholders, including senior creditors. Senior bondholders will also contribute to the recapitalization of Bank of Cyprus.

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Russian Money

The seizure of larger deposits may spark tensions with Russia, the source of an estimated $31 billion in holdings in Cypriot banks, according to Moodyâs Investors Service. A Cypriot mission to Moscow last week failed to yield an alternative to the European-sponsored bailout.

The effort to go after insured deposits, while abandoned, may have harmful repercussions, said Moodyâs in a note early today. âPolicy makersâ recent decisions raise the risk of deposit outflows, capital flight, increased bank and sovereign funding costs and broader financial-market dislocation throughout the euro area in the future,â Moodyâs said.

In a replay of tensions over aid for Greece at the outset of the crisis, European governments had wrangled over aid for Cyprus for nine months, exposing holes in the revamped economic management system that was built in three years of emergency policymaking, often at all-night summits.

A tightening of Europeâs budget-deficit restrictions and new rules to penalize countries with unbalanced economies or asset bubbles failed to stop the rot in Cyprus, which makes up less than 0.2 percent of euro-region output.

Hundreds of protesters massed outside the floodlit presidential palace in Nicosia late yesterday, one group brandishing a banner that said: âItâs capitalism, stupid.â